Lectura 1:00 min

Saving the recovery

Avatar de Roberto Mena

Por Roberto Mena

At this delicate state of widespread uncertainty over the global recovery, in Mexico as elsewhere, the fundamental question is, can economic policies, which appear to be lost in the woods, be freed from their paralysis?

As reported by El Economista Monday, the Bank for International Settlements (BIS) in Switzerland has just published its annual report, and it is a dour document. The bank of central banks was created in 1930 to handle post-World War I reparation payments from Germany to Britain and France. The Great Depression ended reparations, and now the BIS provides among other things sober commentary on the global economy. Its latest report oozes foreboding.

Here are some of the report’s highlights:

--On government debt: The market turbulence surrounding the fiscal crises in Greece, Ireland and Portugal would pale beside the devastation that would follow a loss of investor confidence in the sovereign debt of a major economy.

--On the need for higher interest rates: Our attempts to cushion the blow from the last crisis must not sow the seeds of the next one.

--On inflation: Inflation risks have been driven up by .?.?. dwindling economic slack and increases in the prices of food, energy and other commodities.

After a careful scrutiny of the BIS report, you’d hardly know that there are almost 45 million unemployed in the advanced countries, up 50 percent from 2007. But can governments do anything about it?

Sadly, the BIS has no answer. Economic policy seems paralyzed. There’s an almost palpable sense of helplessness, whether reading the BIS report or listening to Federal Reserve Chairman Ben Bernanke at his recent news conference.

Economics seems to have emptied its toolbox. Patience and prayer are what’s left: Last week’s release of oil stocks, for example, was a desperate prayer for lower gasoline prices.

On the other hand, some Keynesian economists argue that the problem is timidity, not impotence. Governments could do more; they just aren’t. They could spend more or cut taxes more; budget deficits at least in the United States don’t matter much at the moment. The Fed could have a third edition of quantitative easing, buying more bonds to try to lower long-term interest rates.

Robert Samuelson of The Washington Post argues that perhaps the Keynesians are right. But they have not prevailed because there are plausible reasons though not conclusive that they are wrong.

Economists, says Samuelson, argue furiously over multiplier effects of larger government deficits: how much bang you get for every dollar. One study concluded that the effect is much greater during recessions than during recoveries. This seems sensible and suggests that President Obama’s 2009 stimulus helped, but that a new one would do less, which is why Bernanke opposes it.

Yet, a new stimulus might prompt neutralizing actions. Suppose consumers interpret it as a sign of fear and lose confidence. If they raised their savings rate by one percentage point, that would offset US$120 billion of extra government spending. Or investors might react to higher government borrowing by boosting interest rates, though that hasn’t happened yet. (Rates on 10-year Treasury bonds are 3 percent.)

Again, uhe uncertainty is huge. The same caveat applies to the Fed; the evidence that QE2 the purchase of $600 billion of Treasury securities helped the economy is slim, though Bernanke claims it dispelled fears of deflation, i.e. falling prices.

Another economic school, to which the BIS adheres, claims that an obsessive focus on short-term economic results got us into trouble, and we should not repeat that mistake. Piling up too much debt now may make future crises worse. Ignoring incipient signs of inflation will spawn more inflation. Good policies will ultimately be rewarded with sound growth.

There seem to be realistic answers. Governments could commit to future deficit reductions without weakening the recovery if their measures are credible. This is easier said than done. Or the expanding new world

China, India, Brazil could rescue the old. Maybe. But these countries also have the highest inflation: almost 6 percent in China, 9 percent in India. Or today’s slowdown could prove temporary; private demand could revive.

Samuelson concludes that the current need to sustain recovery seems to collide with future needs to curb debt. Our public debate is confusing and our policy paralyzed because no one most obviously, Obama has disarmed the contradiction.

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